Return On Policyholder Surplus
What Does Return On Policyholder Surplus Mean?
Return on policyholder surplus is a financial metric calculated by dividing an insurance company’s net income after taxes, by its assets, with the asset value determined after deducting liabilities. This figure is expressed as a percentage and serves as an indicator of the company’s financial health.
Insuranceopedia Explains Return On Policyholder Surplus
The fate of an insurance company is not solely dependent on the payments made by its policyholders. For one, these payments do not immediately translate into income, as they primarily serve to cover the cost of insurance. Profitable income can only be generated once an insurance contract has lapsed and all premiums have been paid.
However, these payments are not simply set aside; they are often invested. While these investments can yield interest and enhance the financial profile of an insurance company, the stock market can be unpredictable.
Additionally, there is the risk of a large number of claims being made simultaneously, such as in the event of a natural disaster like a typhoon. This phenomenon can lead to substantial claims that challenge the insurer’s financial stability.
Therefore, the return on policyholder surplus depends not only on the amount of premiums collected but also on the volume of claims filed and the performance of the insurance company’s investments.
